1. Copyright © 2000 Addison Wesley Longman Slide #9-1 Chapter Nine THE MONEY MARKETS Part IV Financial Markets

2. Copyright © 2000 Addison Wesley Longman Slide #9-2 The Money Markets Money market securities are usually sold in large denominations. They have low default risk. They mature in one year or less from their issue date.

3. Copyright © 2000 Addison Wesley Longman Slide #9-3 Interest Rates Available on Several Money Market Instruments

4. Copyright © 2000 Addison Wesley Longman Slide #9-4 Participants in Money Markets U.S. Treasury Department Federal Reserve System Commercial Banks Businesses Investment and Securities Firms Individuals (mostly through money market mutual funds)

5. Copyright © 2000 Addison Wesley Longman Slide #9-5 Money Market Instruments Treasury Bills Federal Funds Repurchase Agreements Negotiable Certificates of Deposit Commercial Paper Banker’s Acceptance Eurodollars

6. Copyright © 2000 Addison Wesley Longman Slide #9-6 Results of a Treasury Auction

7. Copyright © 2000 Addison Wesley Longman Slide #9-7 Treasury Bill Rate and Inflation Rate, 1973-1995

8. Copyright © 2000 Addison Wesley Longman Slide #9-8 Federal Funds

9. Copyright © 2000 Addison Wesley Longman Slide #9-9 Negotiable Certificates of Deposit Comparing Interest Rates on CDs and T-bills

10. Copyright © 2000 Addison Wesley Longman Slide #9-10 Commercial Paper Compare Interest on Commercial Paper to Bank Prime Rate

11. Copyright © 2000 Addison Wesley Longman Slide #9-11 Advantages to Banker’s Acceptances 1. Exporter paid immediately. 2. Exporter shielded from foreign exchange risk. 3. Exporter does not have to assess the financial security of the importer. 4. Importer’s bank guarantees payment. 5. Crucial to international trade.

12. Copyright © 2000 Addison Wesley Longman Slide #9-12 Eurodollars London interbank bid rate (LIBID) The rate paid by banks buying funds London interbank offer rate (LIBOR) The rate offered for sale of the funds Time deposits with fixed maturities Largest short term security in the world

13. Copyright © 2000 Addison Wesley Longman Slide #9-13 Interest Rates on Money Market Instruments

14. Copyright © 2000 Addison Wesley Longman Slide #9-14 Money Market Securities and Their Depth

15. Copyright © 2000 Addison Wesley Longman Slide #9-15 Money Market Mutual Funds Open-end investment funds that invest only in short-term securities. No fee for purchasing or redeeming shares. Minimum initial investment of $500 to $20,000. Check-writing privileges. No fee for writing checks No minimum check amount Earn 0.5% to 1% higher return than interest earned on money in the bank. Low risk of default, low rate of risk. Popular to small investors.

16. Copyright © 2000 Addison Wesley Longman Slide #9-16 Growth in Money Market Mutual Funds

17. Copyright © 2000 Addison Wesley Longman Slide #9-17 Money Market Fund Assets